Environmentally-Friendly Growth Without the Pain

The usual way that most people---and many economists---view environmental matters is that they serve as a constraint to growth. Whether and how such a constraint should be respected, then, becomes a normative question, uninformed by our assumptions over how we choose to value environmental services, our evaluation of willigness to pay, the subjective discount placed on the well-being of future generations, and the like.[*] Hence, dealing with issues such as climate change may ultimately be desirable from the point of view of long-run sustainability, societal preferences, and intergenerational equity. By and large, the problem---as a dynamic constrained maximization problem---will yield optimal solutions that, more likely than not, be either Pareto inferior (from a private, not social, point of view), or require an additional condition to be met in equilibrium (such as a Hartwick's rule). Except perhaps in exceptional cases, neoclassical growth will be stunted when responding to environmental concerns (which to emphasize again need not entail a net reduction in welfare).

But the fact of the matter is that---whether one subscribes to the possibility of anthropomorphic reversal of global climate change or not---the Copenhagen Accord does provide the first (of likely many) steps toward a transformation of economies around the world, away from a reliance on carbon-based forms of energy and into alternative, low-carbon sources. By and large, economists and policymakers have viewed the challenge as one of managing the transition by minimizing the negative impact of the aforementioned constraints. Which is why something that Nick Stern mentioned in his recent talk on Green Growth (MP3 audio) at the LSE is so intriguing.

Lord Stern cites work by Daron Acemoglu, Philippe Aghion, and others on directed technical change and the environment (ungated version here (PDF)). Essentially, the key to the model is to allow for strong substitutability between the two (clean and dirty) sectors. (Temporary) direct subsidies toward clean research then yields the socially optimal allocation that avoids environmental disaster. An endogenous switch to the clean technology is supportable in equilibrium, and there needs to be little, if any, long-run distortions---thus, the government will in effect "buy" scientific effort toward green technologies for a short period, and eventually the sector becomes large enough to be self-sustaining.

Ultimately, this is a question that must be confronted by policymakers in both developed and developing countries, especially as we move to a world where emerging economies will account for the bulk of global growth. As was shared in the podcast, there are primarily three ways to being about a reduction in a country's carbon footprint: improved efficiency, increased use of low-carbon technologies, and reforestation. The gains to the first approach are essentially static, in the sense that once the switch to energy-efficient plant and equipment is completed, any carbon savings will be more or less exhausted. The last approach seeks to offset (or even reverse) carbon buildup, but will need to confront both the opportunity cost for the land itself, along with diminishing returns once the more "forestable" areas have been replanted.

The neat thing about a reliance on the second strategy is that the carbon savings, along with the welfare gains, which result from such technologies are dynamic---they accrue every period, so long as the economy continues to grow. This is really what sustainable, green growth is all about. While we may not be fully able to conceptualize the specificities of green technologies that have yet to be invented, it is not hard to imagine the possibilities in a world driven by such green technologies: low-pollution industrial production, transportation, and consumption. What is most amazing about such endogenously-driven technical change is that it is possible for growth to actually continue unabated even in the transition period, before the technologies have been discovered. And in practical terms, such growth would mean increased employment of both high- and low-skilled labor in the production of greentech (the high-skilled labor being deployed for the research, design, and development of new low-carbon technologies, and the low-skilled labor being employed in its construction, manufacture, and distribution).

*. I am aware that the ecological economics school takes a slightly different view of the matter. To oversimplify, their argument is that the economic system in which we operate cannot exist independently of the environment in which it is embedded; hence, the tradeoff is not only desirable but inherently necessary. Partha Dasgupta provides one of the more accessible and informed introductions to the topic.